Is EU gas strategy fit for purpose?

In February, the European Commission published its European Gas Security Strategy consultation paper. What does it mean for the future of the EU gas strategy and is it now fit for purpose?

Overall, the strategy aims to reduce the potential impact of any disruption to gas supplies by encouraging greater integration and co-ordination of the EU's gas supply networks. In addition, it seeks to increase energy security by strengthening inter-governmental agreements between EU and non-EU countries, improving access to LNG imports and expanding gas storage facilities. Lastly, it encourages greater energy efficiency and increasing use of renewable energy in order to reduce gas consumption.

Gas meets a quarter of EU energy consumption and imports provide over half

Currently gas meets around a quarter of the EU’s overall energy consumption, shared between power generation (26%), industry (23%) and of the remainder (51%) heating takes the lion’s share. Today, domestic gas meets less than half of gas demand, the gap being filled by imports of natural gas from Russia (39%), Norway (30%), and Algeria (13%). In addition, LNG from Qatar, Algeria and Nigeria provides around 10% of gas imports and this may be augmented by US LNG.

A reading of this policy document leaves the impression that Brussels is not taking a sufficiently holistic approach to gas policy being rather light on both political and market factors. A case in point is the EC’s aim to boost LNG regasification capacity and gas storage.

LNG regasification utilisation rates were just 14%

Many in the industry would question the role assigned to LNG. Europe is the world’s second largest LNG importer after Japan and regasification capacity at 195 bcm is equal to half of current gas imports, yet LNG regasification utilisation rates were just 14% in 2014. Furthermore, much of the existing gas pipeline import network is under utilised, a situation which will be exacerbated once Gazprom doubles capacity on Nordstream, making much of the traditional overland Russian pipe supply to Germany redundant. Increased Russian deliveries of gas via Nordstream, could turn many LNG plants into white elephants.

Secular decline in gas consumption

Questions remain over the aim of increasing LNG capacity when the indications are that consumption of gas is on a long term downward trajectory owing to anticipated energy efficiency measures, increasing contribution of renewables and the failure to produce a viable carbon capture and storage solution for fossil fuel power generation. Policy makers appear to have taken insufficient notice of economic, technological and political trends, most notably the pro-coal policies in some countries, especially Poland.

The real focus should be on solving bottlenecks in distribution

For many in the industry, the real need is to improve the pace of integration and capacity of pipeline networks to transmit and distribute gas throughout the continent. Two examples will suffice. Spain has an extensive underused network of LNG regasification plants, due to long-standing bottlenecks in the French pipeline network, which restrict Spain’s access to the lucrative German market. Similarly, slow progress in constructing the Świnoujście LNG in Poland to Krk LNG North South pipeline link leaves much of Eastern Europe vulnerable to disruptions of Russian gas supplies.

The EC’s gas strategy is as much a political as it is a market document. As a result, it is offers a compromise, so it is unlikely to please everyone.